31 July 2020 July 31 POINTS OF VIEW CONTENTS One of the worst things that can happen from an independent shipowner’s point of view is when oil majors, miners and traders decide to build their own ships to carry their own cargoes. History is littered with examples of periodic decisions to 2. Dry Cargo Chartering own ships, as opposed to chartering them, often happening at times of high freight At a Standstill rates. Suddenly, enough is enough, and some portion of the freight book is used to invest in owning ships and amortising the loans that leverage the equity. This becomes a hedging mechanism and reduces the total amount of freight going out of 3. Dry Cargo S&P the door, never to be seen again. However, it often happens that in the next Even Keel cyclical downturn in freight, owning ships is declared a non-core business and the assets are sold at the bottom of the market cycle. It is the unintended strategy of ‘buying high and selling low’, the opposite to what one hope to achieve with a 4. Tankers private share and bond portfolio. We will look at two notable examples of this in Summer Recess wet and dry, albeit that both plays served longer term strategies. WEEKLY COMMENTARY WEEKLY The oil major example is Saudi Aramco’s Vela (‘Sail’) shipping arm, which was formed in 1984. In a big move into owning its own tankers, between September 1993 and March 1995, Vela took delivery of 15 ultra-high specification VLCCs at record prices rumoured to be as high as $150m each,* matched only in the sky- THE BIGGER PICTURE high market of 2008. These served Saudi Aramco well in delivering 20% of its crude oil, that was sold on a CIF delivered basis, safely to customers (often its own refineries) in the US, Europe and Asia. Despite the high capital cost, these tankers could often generate very strong operating earnings on account of having access to Aramco fuel oil at cost, minimising the single largest operating cost. Once past 2010, Aramco decided owning tankers was non-core to its main operations and decided to merge the Vela fleet and its delivered crude obligations with another … Vale Brasil : Saudi shipping company. That company was National Shipping Company of Saudi The first of 67 trading valemax … Arabia (NSCSA), now named Bahri (‘Sea’). The MoU was inked in late 2012 and the merger completed in mid 2014. It involved transferring the tankers in a down market, implying a book loss, but the merged entity is now a national champion and is expanding and prospering with Aramco as a key shareholder and sponsor. The mining example is Vale’s shipping arm. Its quantum leap came in 2007 when it went ahead with its valemax project to reduce freight costs on the key Brazil/China route. For several years Vale had been paying out huge sums to ship iron ore to China, later peaking at over $100 a tonne on smaller capesize shipments of 160,000/10 in Q2 2008. In August 2008, Vale ordered 12 valemax units of 400,000- dwt each at Rongsheng and, in October 2009, it followed up with 4 at Daewoo and, in July 2010, another 3 at Daewoo. The first 12 were ordered at the peak of the dry bulk freight and newbuilding price cycles, at over $133m each, making them the most expensive VLOCs ever built.^ The first four Daewoo ships cost $115m each, reflecting a 14% drop in nominal prices in 10 months. In January 2012, China banned bulkers over 300,000-dwcc from entering its ports, a ban that was not lifted until July 2015. This changed the economics for Vale’s ships, and was rumoured to have been prompted by Cosco objections to Vale’s CIF sales and control of this vital shipping route. Between May 2015 and December 2017, all 19 Source : Vale Vale-owned ships were sold to Chinese entities, including Cosco, at considerable book losses. Lessons were learned. Nowadays, miners want to control some ships in partnership with shipowners who will adopt their specifications and help them meet 2030 GHG emission targets, but this time at a low point in the ship price cycle. Anglo American is ordering 4+4+2 x 187,000-dwt duel-fuel bulkers at SWS for $60-65m each that suit Port Acu and Saldanha limits. It will select an owner and provide 10-year TCs. EPS is rumoured to have ordered 5 x 208,000-dwt DF units at NTS for $66m each against 5-year TCs to BHP. Cosco has ordered 10 x 210,000-dwt conventional bulkers from Cosco HI Yangzhou for $53m each and will bareboat them from ICBC against long-term COAs with Chalco to lift bauxite *A basic 320,000-dwt VLCC would cost about $85m today. from Boffa, Guinea in West Africa to China. Early last year, it had ordered 18 similar scrubber-fitted units at $55m each from four Chinese shipyards, also backed ^A basic 400,000-dwt VLOC would cost about $80m today. by Chalco COAs. These JVs work well for both ship owners and cargo interests. WEEKLY COMMENTARY 31 July 2020 Dry Cargo Chartering The BDI closed at 1,350, up from last week’s 1,317. The supramax market continued to soften across most routes this The cape market closed the week at $18,296. This was also up from week, and closed at $9,565 down from last weeks $10,070. In the last week’s close of $17,284. On voyage, Port Hedland to Qingdao Atlantic, the Ultralaz (64,042-dwt, 2018) fixed delivery Naples for a ore runs were fixed at around $6.20 pmt for 170,000 mton 10% prompt trip via the Black Sea and India redelivery Durban at $13,250, stems. In the Atlantic, Oldendorff fixed the Milos Warrior (179,276- while the Veruda (51,886-dwt, 2011) fixed delivery Calabar for a dwt, 2011) at $17.45 pmt for a Tubarao to Qingdao 170,000 mton prompt trip via West Africa to China with manganese ore at a 10% ore stem. On time charter, H-Line fixed the CS Salubrity healthy $21,000. Over in the Indian Ocean, Allianz Bulk took the (180,301-dwt, 2014) delivery Jiangyin for a trip via West Australia Advance (55,638-dwt, 2007) delivery Paradip for a trip via East coast redelivery Singapore-Japan at $15,900. India to China at $14, 750, and in the Pacific the Cheval Blanc (56,732- dwt, 2009) fixed delivery Ningde for a trip via Philippines with nickel The panamax market recovered somewhat this week closing at ore redelivery South China at $9,000 with option North China at $11,045, up from last week’s close of $10,786. In the Pacific, $9,800. Additionally, the Lycavitos (58,786-dwt, 2007) fixed delivery Deyesion fixed the scrubber fitted Star Laura (82,209-dwt, 2006) South Japan for a prompt trip via Australia to China at $8,750. delivery Toyama Shinko via CIS to Singapore-Japan range at $10,500, while Tata NYK took the Zheng Yao (81,716-dwt, 2014) delivery CJK The handy market remained relatively flat once again, closing at for a prompt trip via Australia to India at $9,500. In the Atlantic, $8,539, up slightly from last week’s closing of $8,473. In the Indian front haul rates remained strong as Oldendorff fixed the Pacific Ocean, the Xin Hai Tong 8 (48,897-dwt, 2014) was fixed delivery Kindness (82,177-dwt, 2011) delivery Liverpool for a trip to the Far Haldia for a trip via East coast India to China at $15,000, while the East via the Baltic and COGH at $18,750. Rates from East coast Audacious (46,683-dwt, 2004) fixed delivery West coast India for a South America were also sustained as Cargill fixed the Omicron Sky trip via the Red Sea to China at $9,000. In the Atlantic, rates from (77,031-dwt, 2006) for an August trip to Singapore-Japan range at East coast South America stabilised as we heard that a 34k-dwt $13,850 plus a $385,000 ballast bonus. Cargill were also active on vessel fixed at $12,500 for a trip from the Plate to the the period side of things and took in the SSI Dignity (81, 221-dwt, Mediterranean, and a 39k-dwt vessel fixed at $12,000 for a trip to 2014) delivery Dalian for 11/13 months at $10,500 with worldwide the Continent. There was once again limited activity in the Pacific redelivery. The Steel Authority of India fixed a TBN vessel for a and minimal interest in tonnage for period. 75,000 mton 10% coal stem next month, from Newport News to East coast India at $28.45 pmt. Representative Dry Cargo Market Fixtures Vessel DWT Built Delivery Date Redelivery Rate ($) Charterers Comment Singapore- Via CS Salubrity 180,301 2014 Jiangyin 30 July 15,900 H Line Japan W.Australia Welfine 93,146 2011 Gibraltar 28 July China 19,000 CNR Int Bauxite BBG EC South Skaw- 82,000 2020 14 Aug 13,500 CNR Guigang America Gibraltar Retro Singapore- Via EC South Marielena 81,354 2008 6 July 10,500 Bunge Singapore Japan America Odysseas L 81,259 2013 Gibraltar 28 July Rotterdam 7,000 Norden Via Murmansk Via Black Sea Ultralaz 64,042 2018 Naples PPT Durban 13,250 CNR and India Lycavitos 58,786 2007 S. Japan PPT China 8,750 CNR Via Australia South Cheval 2009 9,000/ 56,732 Ningde 31 July China/Nort YND Via Philippines Blanc 9,800 h China Via South Besiktas M 53,020 2003 Gresik PPT India 10,000 CNR Africa Audacious 46,683 2004 WC India 08/09 Aug China 9,000 CNR Via Red Sea Exchange Rates This Week Last week 37,000 Capesize BCI-5TCA Panamax BPI82-TCA JPY/USD 104.67 105.92 32,000 Supramax BSI58 - TCA USD/EUR 1.1848 1.1601 27,000 Handysize BHSI 38 -TCA US$ per day per US$ 22,000 Brent Oil Price This Week Last week US$/barrel 43.25 43.17 17,000 12,000 Bunker Prices ($/tonne) This week Last week 7,000 Singapore IFO 282.0 275.0 2,000 MGO 387.0 395.0 Rotterdam IFO 259.0 250.0 17-Jul-19 11-Jul-20 31-Jul-20 13-Jan-20 27-Jun-19 01-Jun-20 21-Jun-20 15-Sep-19 02-Feb-20 22-Feb-20 02-Apr-20 22-Apr-20 06-Aug-19 26-Aug-19 05-Oct-19 25-Oct-19 13-Mar-20 MGO 358.0 364.0 12-May-20 04-Dec-19 24-Dec-19 14-Nov-19 WEEKLY COMMENTARY 31 July 2020 Dry Bulk S&P Given COVID-19 has caused about as much uncertainty on last week’s sale of Ocean Jorf (61,269-dwt, 2016 Iwagi) as any of us can remember, it is odd to find consistency in which achieved $18.85m.